The flip side of the monetary policy statement


The latest monetary policy statement (MPS) covering the 2021-2022 financial year is in the spotlight from different sides, especially since it comes in a context not seen for a hundred years. It is a new emerging normal life that adapts to. The policy statement, made public by the Bangladesh Bank (BB), obviously leaves some setbacks next to its positives.

In addition to a number of grammatical / technical errors, the document is littered with ambitious expressions and platitudes, thus diluting its analytical rigor. Another shortcoming is that the actual figures for the previous year (2020-2021) have not been compared to the projections of the last SPM.

Although the ongoing pandemic is mentioned, there is no elucidation of the difficulties facing the global community in trying to deal with the health emergency. Vaccination hesitation, ideological resistance, slow deployment, missteps on the part of the authorities, unavailability of vaccines, lack of monitoring and traceability, logistical problems, mixtures and massive movements of people deserve to be mentioned. Even within the territories, pockets of infection continue to emerge, with the latest episode taking place in China. In addition, dangerous mutations lower the likelihood of normalcy.

The MPS appears to be based on archaic and conventional measures. Now is the time to introduce new indicators to capture a more global pulse of the economy. The Purchasing Managers Index (PMI) and consumer sentiment are two criteria that are well known and widely used in the West. Even India has its own PMI.

Other possible indicators could be the number of courier packages processed nationally, rail freight in tonnage, gasoline consumption, tolls collected on highways et al.

The report rightly points out that interest rates (especially long-term bond yields) are showing signs of rising in the West as inflation emerges. Then, it (provisionally) links this phenomenon to foreign direct investment (FDI) in developing and emerging economies. However, FDI does not react to interest rate fluctuations, unlike portfolio investments.

Regarding world trade in goods, supply bottlenecks on the one hand and the return to normal in some parts of the world on the other hand have meant that demand has greatly exceeded supply. The prices and availability of products – from finished materials to raw materials – have been affected. In addition to all this, due to many factors, the shipping space is limited. These explanations do not appear in the MPS as being the source of inflation.

The commentary documents on the effectiveness of the various stimulus packages taken in hand in response to the pandemic. The media say these subsidized bank loans were diverted to the stock market and paid off past debts. If so, the central bank is well advised to address such breach of trust.

The fact that food prices have started to increase internationally is recognized, but how this seeps into Bangladesh’s food inflation is not specified.

There is a lot of glee that interest rates have been lowered. However, there are two collateral damages: bank margins are now under great pressure affecting profitability. Note that there is excess liquidity preventing banks from collecting interest income.

Depositor returns also entered negative territory. In effect, borrowers embezzle the profits of depositors.

Inflation must fall further to raise the bar. On the other hand, the Taka would tend to like it. Low inflation countries benefited from relatively stronger currencies; Japan and Switzerland are examples.

The wide spread in loan rates between banks and microfinance institutions tells you the true cost of money in Bangladesh. Some individuals may therefore be tempted to divert their savings to the capital market. But for the unwary, there are many pitfalls.

The 2.0 percent government subsidy for inbound remittances is paying off as Bangladesh’s reserves can now cover the equivalent of seven months of imports. However, we are unaware of the cost involved.

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